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Learnings from Amul

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One of the tricky issues in vertical integration is striking a balance between the need to have control over crucial elements of the value addition process and the need to encourage technology development among suppliers
Firms often vertically integrate to reduce uncertainties in sourcing and marketing. They may also feel that control over a larger portion of the value chain, may facilitate differentiation. What is often forgotten is that different activities along the value chain may need different managerial styles.
Vertical integration: Doing a Cost-Benefit Analysis
Benefits
• Bringing different elements of the value chain together can generate efficiencies.
• Integration lowers the cost of scheduling, coordinating and responding to emergencies.
• Integration reduces the need for collecting various types of information from the external environment and cuts transaction costs.
• Upstream and downstream stages can develop more efficient and specialized procedures for dealing with each other than would be possible with independent suppliers/ customers.
• The firm can gain more expertise in the technology associated with upstream and downstream businesses.
• Integration reduces uncertainty about supply of parts/raw materials and demand for finished goods.
• The bargaining power of suppliers and customers can be reduced.
• By controlling a larger segment of the value chain, a firm has greater scope for differentiation.
• In some cases, vertical integration can raise entry barriers.
• Forward integration can help generate better price realisation.
• Backward integration can help protect proprietary knowledge.

Costs
• Different segments of the value chain demand different competencies.
• By increasing the fixed costs business risk is also increased.
• Integration reduces the firm’s ability to change partners as in-house suppliers cannot be asked to

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